We review what the financial economics literature has to say about the unique ways in which the following three classic agency problems manifest themselves in family firms: (i) shareholders v. managers; (ii) controlling (family) shareholders v. non-controlling shareholders; and (iii) shareholders v. creditors. We also call attention to a fourth agency problem, unique to family firms: the conflict of interest between family shareholders and the family at large, which can be thought of as the “super-principal” in a multi-tier agency structure akin to those found in other concentrated ownership structures where the controlling owner is the state, a bank, a corporations, or other institutions. We then discuss the solutions or corporate governance mechanisms that have been devised to address these problems and what research has taught us about these mechanisms’ effectiveness at solving these four conflicts in family firms.

Over 90 percent of the deaths from natural disasters have occurred in low- and middle-income countries, yet more than 85 percent of in-kind and monetary relief coming from business organizations worldwide has gone to high-income economies. From the perspective of social welfare, does this mean an inefficient allocation of economic resources? Is this a failure of the doing well by doing good argument? To assess these empirical questions, we study donations by corporations from 65 countries to the relief and reconstruction fund of 3,115 high-magnitude, low probability disasters that affected the world between 2003 and 2013. We argue and provide evidence that business giving efficiently specializes in black swans, highly unexpected and costly phenomena that maximize the incapacity of the state to cope with the economic hardship. In such contexts, corporate giving acts as a stop-loss mechanism and complements public funding in nations that have been historically deprived of public multilateral aid.

Workers can build their careers either by moving into a different job within their current organization or else by moving into a new job within a different organization. We use matching perspectives on job mobility to develop predictions about the different roles that those internal and external moves will play within their careers. We propose that internal and external mobility are associated with very different rewards: upwards progression into a job with greater responsibilities is much more likely to happen through internal mobility, but external moves will nonetheless offer similar increases in pay, as employers seek to attract external hires. We also examine how these predictions change when moves take workers across job functions as well as when external mobility happens involuntarily. Analyses of data on the careers on MBA alumni are used to support these arguments. Despite growing interest in boundaryless careers, our findings indicate that internal and external mobility play very different roles in executives’ careers, with upwards mobility still happening overwhelmingly within organizations.

This paper explores the phenomenon of managerial overoptimism, focusing on the cognitive underpinnings of the mechanisms that generate this bias. It develops a formal model of probability estimation that is inspired by the biological (cognitive neuroscience) evidence on associative information processing in the brain. The model is able to make novel, testable predictions about managerial overoptimism. It is able to parse out three mechanisms that could lead to overoptimism, as well as predict boundary conditions on when these effects should be observed and when the opposite (a pessimistic bias) should be observed instead. Furthermore, it predicts that under certain conditions, attempts by managers to “debias” their estimates might exacerbate the overoptimistic bias.

Men are far more likely to start new ventures than women. Drawing on the hubris theory of entrepreneurship, we argue that one explanation of this gap is that women have lower susceptibility to hubris and higher levels of humility, the “male hubris-female humility effect.” Decreased hubris suggests that women faced with low-quality founding opportunities are less likely to engage in entrepreneurship than men. Increased humility implies that women will also make fewer founding attempts than men when opportunity quality is high. Using a data set of serial founders in crowdfunding, we find evidence of both hubris and humility effects decreasing female founding attempts relative to men. While decreased hubris benefits women individually, we argue that it disadvantages women as a group, as it leads to by 23.2% fewer female-led foundings in our sample than would have occurred if women were as immodest and overconfident as men.

Mental models, reflecting interdependencies among managerial choice variables, are not always correctly specified. Mental models can be underspecified, missing interdependencies, or overspecified, containing non-existent interdependencies. Using a simulation model, we find that under- and overspecification have opposite effects on exploration, and thereby performance. The effects are also opposite depending on whether the manager controls all choice variables. The mechanism underlying our results is a feedback loop: misspecificed mental models influence managerial learning about the effectiveness of choices; this learning guides how the environment is explored, which in turn affects which information will be generated for future learning. We explore implications of these results for strategic management and introduce the notion of “cognitive fit” between the mental model of the decision maker and the strategic environment.

Over two decades of research has indicated that group affect is an important factor that shapes group processes and outcomes. We review and synthesize research on group affect, encompassing trait affect, moods, and emotions at a collective level in purposive teams. We begin by defining group affect and examining four major types of collective affective constructs: (a) convergence in group affect; (b) affective diversity, that is, divergence in group affect; (c) emotional culture; and (d) group affect as a dynamic process that changes over time. We describe the nomological network of group affect, examining both its group-level antecedents and group-level consequences. Antecedents include group leadership, group member attributes, and interactions between and relationships among group members. Consequences of group affect include attitudes about the group and group-level cooperation and conflict, creativity, decision making, and performance. We close by discussing current research knowns, research needs, and what lies on the conceptual and methodological frontiers of this domain.

This paper proposes an approach for modeling strategic interactions that incorporates the costs to firms of changing their strategies. The costs associated with strategy modifications, which we term “repositioning costs,” are particularly relevant to interactions involving grand strategies. Repositioning costs can critically affect competitive dynamics and, consequently, the implications of strategic interaction for strategic choice. While the literature broadly recognizes th eir importance, game-theoretic treatments at the grand strategy level, with very limited exceptions, have not focused on them. We argue for greater recognition of repositioning costs and demonstrate the fertility of this approach with a simple model th at illustrates how repositioning costs may facilitate differentiation and affect the value of dynamic capabilities.

In research on strategic networks, the addition or deletion of ties is the primary mechanism through which firms alter their networks. Prior work overlooks another mechanism that is at least equally important from a strategic standpoint: the ability of a firm to acquire another firm in the network and inherit its network ties. Such 'node collapse' can radically restructure the network in a single transaction, constituting a revolutionary change compared to the more evolutionary effect of tie additions and deletions. Moreover, acquisitions occur in highly competitive markets, making it crucial to account for the fact that multiple firms may simultaneously seek to reach advantageous network positions. We explore how these issues affect the dynamics of the network at the firm and industry levels through a simulation in which actors acquire one another to span more structural holes. We find that acquisition-driven network change affects the distribution of individual firms' performance and the structural properties of the industry-wide network.

I investigate the factors explaining the variance of firms helping communities in the aftermath of natural catastrophes with a theoretical model comprising firm-, community-, and event-specific factors. In this model, corporate decision makers follow a mix of social preferences and strategic considerations. I use unique data of corporate donations to the relief fund of natural catastrophes that affected different countries in the period of 2002-2012 and a panel of 2011 multinational enterprises from 61 countries. The preliminary results show that firm’s visibility and economic connection with the affected community, and the relative development of the community exert a nontrivial influence in the magnitude and frequency of corporate donation. Additionally, I find that the salience of the event is significantly more influential in the corporate decision than the associated human loss.

When firms decide to engage in the provision of collective goods that benefit social welfare (i.e., to behave pro-socially), they may consider the economic relevance of such goods for their own market operation. The bigger the stake of the firm in a given market, the greater its reliance on the market’s collective goods (e.g., communication networks, transportation infrastructure). Therefore, a market’s relative importance for a firm should be a significant predictor of corporate pro-social behavior—an association that is not explained by theories on social preferences or strategic considerations. I test this argument by constructing a measure of corporate economic reliance on market systems based on the literature on club goods and analyzing data on corporations’ philanthropic responses to 3,115 natural disasters between 2003 and 2013, inclusive. I show that accounting for variation in economic reliance leads to a more accurate prediction of the frequency and magnitude of corporate pro-social behavior than widely invoked arguments rooted in the strategic philanthropy and institutional literatures, which neglect such firm-market connection.

Internal hiring matches current employees to new jobs within an organization and represents a critical yet overlooked source of value creation, enabling managers to generate greater value from their existing stock of human resources by creating complementary matches between people and jobs. Yet despite the fact that more than half of all jobs are filled internally, our knowledge of how workers are allocated to jobs within organizations remains grounded in work on bureaucratic internal labor markets and intraorganizational careers describing internal labor markets that bear little resemblance to their contemporary counterparts. In this paper, I describe the effects of two processes that have emerged to replace the use of bureaucratic rules for facilitating internal mobility – market-oriented posting and relationship-oriented sponsorship – on two sets of outcomes which link directly to value creation and value capture – quality of hire and compensation. Using data on over 11,000 internal hires made over a five year period within a large US health insurance company, I find that market-oriented posting results in better hires but at a higher cost. In addition to providing a more complete picture of hiring and mobility, this work sheds light on the tradeoffs associated with the use of markets and networks for allocating resources within firms.

When high-stake organizational decisions that affect market competition have to be conducted in a short time intervals with information insufficiency of the social need, the probability of stakeholder reactions, and even the organizational capacity to respond, what is the relative economic efficiency of leading vis-à-vis following (i.e., imitating, abstaining, or choosing a different response)? I investigate this question using a specific form of non-market strategy: the organizational decision to donate to the relief fund of highly disruptive earthquakes. About 95 percent of corporate pledges to earthquakes come within a month of the disaster date, and because earthquakes are the most socially salient type of natural disasters, philanthropic responses to these shocks can generate media visibility and, in some cases, market rents. The original dataset is comprised by 10 years of donation behavior of 2,000 firms from 65 countries for earthquakes that affected 57 countries.

This paper investigates how spinoffs improve the quality of analysts' research about diversified firms, theorizing that these deals may induce analysts to revisit their earlier coverage decisions. The gains resulting from these shifts are expected to be more pronounced when a firm undertakes a legacy (rather than a non-legacy) spinoff, which removes the business that may be constraining analysts' coverage decisions in the first place. Consistent with this argument, firms that undertake legacy spinoffs experience greater improvements in the composition and quality of their analyst coverage than their non-legacy counterparts, and in their overall forecast accuracy and stock market performance. Taken together, these findings shed light on the relationships among the scope decisions, analyst coverage, and valuations of diversified firms.

The management literature has emphasized the role that imitation plays on corporate strategy. Firms tend to align to the social norms observed by reference peers. A widely invoked argument is that the community where firms are originally headquartered imprints them with a longstanding influence toward similar patterns of behavior. In this paper, I suggest that this argument is not easily generalizable once the organization internationalizes. Using the context of philanthropic responses in the aftermath of natural disasters, I show that the non-market activity of multinational firms that share the metropolitan area as headquarters may be significantly different. I find that firms tend to mimic the characteristics of the response of peers from the same industry despite that such organizations have different countries of origin. Furthermore, organizations that share metropolitan region as headquarters show dissimilar responses in a frequency that is not explained by chance. This study extends the global strategy and community literatures by proposing that the influence of geographic location on organizational behavior is less stable than institutional scholars tend to suggest. The systems of social norms and beliefs that firms join as they internationalize become more salient for organizational decision making than those learned in their communities of origin. The study also provides a more nuanced awareness of the role of the non-market activity of multinational enterprises in the context of geographically located systemic shocks.

This study examines the institutional role of transnational ethnic communities in MNEs’ location choice. Research has revealed that ethnic communities facilitate international expansion by serving as conduits of knowledge. We propose that ethnic communities also fulfill a governance role by facilitating entry into locations that present high transaction hazards for foreign firms. This effect is based on community norms and social enforcement, and becomes particularly helpful in places with weak formal institutions and high transaction hazards. We test these ideas on the location choices of Korean banks across Chinese provinces during 1992-2013. Taking advantage of a historical event that created a quasi-random distribution of Koreans across provinces, we find support for our ideas.

In fields as diverse as technology entrepreneurship and the arts, crowds of interested stakeholders are increasingly responsible for deciding which innovations to fund, a privilege that was previously reserved for a few experts, such as venture capitalists and grant-making bodies. Little is known about the degree to which the crowd differs from experts in judging which ideas to fund, and, indeed, whether the crowd is even rational in making funding decisions. Drawing on a panel of national experts and comprehensive data from the largest crowdfunding site, we examine funding decisions for proposed theater projects, a category where expert and crowd preferences might be expected to differ greatly. We instead find substantial agreement between the funding decisions of crowds and experts. Where crowds and experts disagree, it is far more likely to be a case where the crowd is willing to fund projects that experts may not. Examining the outcomes of these projects, we find no quantitative or qualitative differences between projects funded by the crowd alone, and those that were selected by both the crowd and experts. Our findings suggest that crowdfunding can play an important role in complementing expert decisions, particularly in sectors where the crowds are end users, by allowing projects the option to receive multiple evaluations and thereby lowering the incidence of "false negatives."

We examine the social perception of emotional intelligence (EI) through the use of observer ratings. Individuals frequently judge others’ emotional abilities in real-world settings, yet we know little about the properties of such ratings. This article examines the social perception of EI and expands the evidence to evaluate its reliability and cross-judge agreement, as well as its convergent, divergent, and predictive validity. Three studies use real-world colleagues as observers and data from 2,521 participants. Results indicate significant consensus across observers about targets’ EI, moderate but significant self– observer agreement, and modest but relatively consistent discriminant validity across the components of EI. Observer ratings significantly predicted interdependent task performance, even after controlling for numerous factors. Notably, predictive validity was greater for observer-rated than for self-rated or ability-tested EI. We discuss the minimal associations of observer ratings with ability-tested EI, study limitations, future directions, and practical implications.

Raffi Amit, Y. Ding, B. Villalonga, H. Zhang (2015), The role of institutional development in the prevalence and performance of entrepreneur and family-controlled firms, Journal of Corporate Finance, (forthcoming).
Abstract

We investigate the role played by institutional development in the prevalence and performance of firms that are owned and/or managed by entrepreneurs or their families, while controlling for the potential effect of cultural norms. China provides a good research lab since it combines great heterogeneity in institutional development across its provinces with homogeneity in cultural norms, law, and regulation. Using hand-collected data from publicly listed Chinese firms, we find that, when institutional efficiency is high, entrepreneur- and family-controlled firms are more prevalent and exhibit superior performance than non-family firms. We find that the positive effects of family ownership and the negative effects of family control in excess of ownership that have been documented in earlier studies around the world are only significant in high-efficiency regions, and only for family-controlled firms proper, but not for entrepreneur-controlled firms. Institutional development also helps reconcile the divergence of results across prior studies regarding the performance impact of founders and their families as managers and not just owners. When institutional efficiency is high, the sign of the management effect is entirely contingent of whether the Chairman or CEO is the entrepreneur himself/herself (positive) or a family member (negative); when institutional efficiency is low, the effect is positive in both cases, and more strongly so in the case of a family member serving as CEO.

Raffi Amit, Y. Ding, B. Villalonga, H. Zhang (2015), The role of institutional development in the prevalence and performance of entrepreneur and family-controlled firms, Journal of Corporate Finance, (forthcoming).

Agency theory predicts that the right incentives will align agents’ interests with those of principals. However, the resource-based view suggests that to be effective, the incentive to deliver must be paired with the ability to deliver. Without requisite ability, an agent's incentives may yield the desired alignment but not the desired results. Using the corporate boards of Fortune 500 firms as an empirical context, this study shows that the presence of directors who lack top-level business experience but have large ownership stakes is negatively associated with firm value, an effect that becomes larger as the number of such directors on a board increases. Furthermore, firm value rises after such directors depart from corporate boards, with the greatest increases occurring in firms where the reduction in the number of these directors is the largest. While agency theory highlights the importance of having the right incentives in place, this research suggests that doing so can be ineffective if the right resources are not in place as well.